SIG accelerates transformation after first-half profits decline

SIG blamed a 22% fall in profits in the first half of the year on poor weather and fewer people moving home as the building products supplier said it was accelerating its transformation process to meet full year targets.

On revenues up 1% to £1.36bn in the six months ended 30 June, underlying profit before tax fell to £26.9m, from £34.4m a year before. But excluding one-off property profits, PBT was down only 7% £26.6m as operating margins fell in the UK but improved in Europe.

The interim dividend was held at 1.25p per share as underlying basic earnings per share from operations decreased fell to 3.2p from 4.2p. On a statutory basis EPS was up to 2.5p from the loss per share last year of 3.5p.

"Ten months into our transformation of SIG, progress is well underway and we are starting to see evidence of delivery," said chief executive Meinie Oldersma.

With the refocusing of the business portfolio of businesses now largely complete, he pointed a 19% decline in net debt in the period to £176.1m, bringing down leverage to 1.8 times EBITDA from 2.3% a year ago, supporting an increase in return on capital employed to 9.2% from 7.8%.

"Gross margins are improving in key businesses, operating costs are under control and working capital is beginning to fall. Our senior leadership team is in place, our management capability is improving and better data is beginning to make a difference to the quality of our decision-making," Oldersma said.

However, he said the trading backdrop in the first half was unhelpful, blaming significant challenges in the UK on poor weather in the early months of the year and continuing macro uncertainty.

UK revenues fell 2.3% on a like-for-like basis and operating profit down 40% to £14.2m, as a "weak" repair and maintenance market and "fairly subdued" commercial market hit sales.

Mainland Europe and Ireland was more positive, with LFL revenues increasing 2.8% and underlying operating profit increased by 10.7% to £27.0m.

Seeing continuing challenging trading conditions in the UK, Oldersma said he had "accelerated certain transformational workstreams" and now had "increased visibility over delivery of significant profit improvement during the second half of 2018 and beyond".

"As a result, we remain optimistic of delivering a full year result in line with our expectations absent any further deterioration in trading conditions, notably in the UK. Whilst there remains considerable work to be done, we remain confident in our ability to deliver our transformational plans."

Unsurprisingly the half year results saw underlying profits ex property drop 7% to £26.6m on the back of a 1% rise in revenue %. Net debt fell c. £41m to £176m with the key swing factor being a £45m inflow on working capital. This takes leverage to 1.8x from 2.3x a year ago. Management remain confident that it will hit the 1-1.5x range by the year end.

The group has made good progress on gross margin improvement helped by teh improved data now being delivered. Operating costs are now heading lower but the ratio to sales was higher in H1 due to the weak UK sales figures. With a further headcount reduction of 533 in H2 the group expects to see material savings (£12m+) in the balance of the year. Most of the leadership changes have now been made while the IT capability on data is still being stepped up.

Overall the weakness of the UK market has meant our top end forecasts now look too optimistic and as a result we are cutting our underlying PBT back to £80m for FY18 and £100m for FY19e from £85m and £106m respectively. This leaves us broadly in line with consensus. Our EPS drop to 10.1p and 12.5p respectively. The key change is lower revenue assumptions in the UK which has removed the potential positive surprise we think the group could have given from its operational changes. In valuation terms this means the shares are now trading on a PE of 12.1x for FY18 followed by 9.8x for FY19 with an EV/EBITDA of 7.1x and 5.9x and a FCF yield of 12.5% and 13% respectively. We trim our TP to 180p to reflect the lower forecasts but continue to see good recovery value in the shares. Remains a Buy.

Analyst: Clyde.Lewis@peelhunt.com (+44 (0) 20 7418 8949) , Analyst: Gavin.Jago@peelhunt.com (+44 (0) 20 7418 8838) , Analyst: Alexander.Stout@peelhunt.com (+44 (0) 20 7418 8944)